Newt’s Take on Taxes

Q: What is the highest federal income tax any American should have to pay? We are looking for a number.

PERRY: Seven percent flat tax. Simple. Keep it simple.

SANTORUM: Well, my plan has two rates, 10 and 28 percent, which is the highest rate under Ronald Reagan when he cut taxes.

ROMNEY: I would like 25 percent, but right now it’s at 35, so people better pay what is legally required. But ultimately let’s get it down to as low as we possibly can, if it’s 20, if it’s 25 but paying more than 25 percent, I think, is taking too much out of our pockets.

GINGRICH: I would like to see it be a flat tax at 15 percent and I would like to see us reduce government to meet the revenue, not raise revenue to meet the government.

PAUL: Well, we should have the lowest tax that we’ve ever had, and up until 1913 it was 0%. What’s so bad about that?

GINGRICH: [to Romney]: One of the characteristics of Obama in his class-warfare approach has been to talk about going after people who made over $250,000 a year and divide us. On about page 47 of your plan you have a capital-gains tax cut for people unde $200,000, which is actually lower than the Obama model. Now, as a businessman, you know that you actually lose economic effectiveness if you limit capital-gains tax cuts only to people who don’t get capital gains. So I’m curious: What was the rationale for setting an even lower base mark than Obama had?

ROMNEY: Well, the reason for giving a tax break to middle-income Americans is that middle-income Americans have been the people who have been most hurt by the Obama economy. People are having a hard time making ends meet. And so if I’m going to use precious dollars to reduce taxes, I want to focus it on where the people are hurting the most, and that’s the middle class.

Expansive government rapidly becomes expensive government, and that requires new and higher taxes. The transfer of money from citizens to the bureaucracy then further weakens civil society & leads to even more expensive & even more expensive government. That effort to finance Big Government through higher taxes is a direct assault on civil society, and the “death tax” is a prime example. This tax, which is in a constant state of flux and was resurrected in 2001 after effectively disappearing in 2010, falls especially hard on small business. That sector contributes immensely to America’s social and economic dynamism, often acting as the cornerstone of community organizations and local philanthropy. Entrepreneurs and shopkeepers are community leaders and, when prosperous, are generous with their time and money. Prosperity and generosity are highly correlated, as those with more to give feel obliged to give more.

I looked at the budget yesterday which has a $640 billion revenue item from energy tax. I thought to myself; let me get this straight, we’re not going to raise taxes on anyone below $250,000 a year unless you use electricity. And we’re not going to raise taxes on anyone under $250,000 a year unless you buy gasoline, and we’re not going to raise taxes on anyone under $250,000 unless you buy heating oil, and we’re not going to raise taxes on anyone under $250,000 a year unless you use natural gas.

Why don’t we match the Chinese and have zero capital gains tax? Now, when you go back home to try to explain this you don’t have to explain anything complicated. Just find people with a 401K or a pension plan, or a savings account for their children to g to college and say to them: How would you like for that to be 20-40% more valuable in a few weeks? That’s what eliminating the capital gains tax would do. Because suddenly, people put capital back in the market, the market would rise in value.

I think we need to get independent from this leader fascination with the presidency. I voted against two Reagan tax increases. I voted against George H. W. Bush’s 1990 tax increase. It is a totally honorable and legitimate thing to say I am going to support the candidate and oppose the policy. This idea [is] that I think we [did] Pres. George W. Bush a grave disservice by not being dramatically more aggressive in criticizing when they were wrong, and being more open when they were making mistakes.

Four out of five Americans would like to have the option of a one-page tax form with a single tax rate. This concept of an optional flat tax rate was developed by Steve Forbes when his flat tax campaign was undermined by criticisms that it would take away popular tax breaks. Forbes proposed giving American taxpayers an opportunity to choose simplicity versus complexity and a single rate over a lot of deductions. They call it the free choice flat tax, and it’s an idea whose time has come.

All workers and corporations would have the freedom to choose each year to file their income taxes either under the new free choice flat tax option or under the current US income tax code.

Rhode Island adopted an optional flat tax, and lawmakers there expect that it will make the state more competitive with neighboring states in attracting new business and entrepreneurs who create jobs.

We need to change our tax policies to make American companies more competitive around the world. One example is the tax incentives for corporate headquarters location. There was a significant tax advantage for Daimler to acquire Chrysler but there was a significant disadvantage for Chrysler to acquire Daimler. By remaining blind to the consequences of our tax code, we are favoring market forces that will gradually lead to more takeovers of American companies by foreign firms (e.g. Siemens taking over Westinghouse). The European Union now blocks American mergers even between American companies (e.g., Honeywell & General Electric). If we want the US to be the multinational headquarters of the world, we are going to have to rewrite our tax laws so that there are no tax disadvantages to an American firm acquiring an overseas competitor. Moreover, we might want to consider creating an incentive for American firms to make acquisitions so the US becomes the center of executive talent in the world.

We should create tax incentives that encourage research and development. The 50 percent research and development tax credit should be made permanent and be applied to companies that are willing to take on government’s “grand challenges” (for example, the first inhabitable moon base). Investments in new technology and machinery should also be expensed 100 percent in the first year. The present complex code of depreciation makes no sense in a time of rapid change. It is better to encourage overinvestment in new technology and new machinery to keep American workers at the cutting edge of opportunity. Our goal should be to ensure that American workers have newer, better, and more productive equipment than their foreign counterparts.

We must eliminate the capital gains tax to encourage investing. Federal Reserve Chairman Alan Greenspan testified that the most economical rate for taxing capital gains is zero because tax-free capital gains will encourage much greater risk-taking and lead to more entrepreneurial behavior. This leads to more prosperity, a bigger economy, and better jobs.

One of the key values of most conservatives is opposition to tax increases. This is not only right in itself, but helpful as well, because it protects us from all sorts of temptations that the liberals love to place before us. Conservatives are elected by taxpayers who believe they already pay too many taxes, who want smaller and more efficient government, and who wish to be able to keep more of the money and property they have earned by the sweat of their brows. They feel betrayed when their own leaders are maneuvered into supporting bigger and ever more intrusive government by agreeing to raise taxes. If they wanted that, they would have voted for the liberals in the first place.

The principle of keeping the people on it all the way is my contribution to the great tax reform debate. Some intelligent and persuasive people want a flat income tax. Some other intelligent and persuasive people want to see a sales tax replace any income tax. So my goal in the great tax reform debate is to make sure that it is carried way beyond the experts and advocates and gets a thorough airing in the minds of the voters. I want them to tell me what they think about this question. There is a distinction between public judgment and public opinion. The latter is what people tell pollsters off the top of their heads. Public judgment, by contrast, is what develops over time when people pay attention to something and discuss it with their friends and neighbors. It takes a long time to develop and involves a complex social interaction that is largely unplanned and unprogrammable.

Consider the Earned Income Credit program, one of the biggest scandals in the IRS. This program provides cash to people below a certain income level. The Clinton Administration’s own estimates of waste, fraud, and error indicate that the program has a 21% rate of error. That means that $1 out of every $5 distributed is wrong. There are big problems in a 21% error rate in a government program that gives away money. First it teaches people to commit fraud. A society in which the dishonest gain more benefit than the honest is one whose very fabric is being frayed. Second, it points up a grotesque double standard in the inner workings of the IRS: when you send them your money, they punish you for anything less than 100% accuracy, but when they send your money to someone else, they accept their own massive error rate. The IRS sends out an estimated $5 billion annually in wrong payments under the Earned Income Tax program. That is enough money to abolish the entire death tax.